Vale wants higher Asian iron ore prices; impact in North America unclear
By Tom Stundza -- Purchasing, 10/16/2008 2:00:00 AM
Brazilian Mining Company Vale is holding negotiations with its Chinese and Japanese iron ore customers on revised higher prices for fiscal 2008 contracts that were settled in February. The goal is to bring Asian prices into line with those charged to European clients. In a statement, the world's largest iron ore supplier says Asian steelmakers pay between 11% and 11.5% less than their European counterparts for iron ore, depending on quality. So, Vale wants a 12% price increase on already signed contracts.
This regional customer/supplier soap opera probably will have no direct impact on North American iron ore pricing, which is 13% lower than Asian prices because it is based more on local supply than imports, but could set a global market pricing trend in 2009. Vale sells more iron ore than any other company in the world and nearly 70% of its revenue is from iron ore sales in Asia, South America and North America. It settled for less than Australian miners because the firm miscalculated the market and settled on a new contract earlier than they did.
Rival ore supplier BHP Billiton won a price increase of as much as 97% in July from Baosteel Group, China's largest steelmaker, matching a similar agreement reached in June by another rival miner, Rio Tinto Group. BHP and Rio Tinto, which ship their ore from Australia, both argued for bigger increases than competitor Vale, which raised the price for its ore to Chinese clients by as much as 71% effective in April.
Vale now has asked Chinese mills for an increase similar to the proposed Japanese market increase. However, the timing of Vale's new 12% price hike move is being questioned. That's because steel prices in recent weeks have fallen in Asia, Europe and the U.S. because of a slowing world economy. And, if the mills curtail some production to tighten supplies and firm prices, they will only further reduce their need for iron ore.
Some Asian steelmakers privately say they will protest the increase by not paying or finding other suppliers. They point out that the Asian iron ore market has softened and stockpiles of iron ore are plentiful. Even Vale says the new price levels aren't assured.
Vale is seeking to raise prices before annual contracts expire with such clients as Nippon Steel, JFE Holdings and Sumitomo Metal Industries. These are Japan's three biggest steelmakers and they already have forecast declines in profit this fiscal year because of high costs for iron ore and other raw materials while steel prices are declining.
Also, Merrill Lynch & Co. analyst Takashi Enomoto in Tokyo tells clients that "the proposed iron ore cost increase, if successful, would have only a minor impact on steelmaking costs in Japan" because it might accelerate purchasing from China. And, "the recent plummet in Chinese ore spot prices is likely to constrain the margin of any additional (Brazilian) price hikes." That comment refers to a 4% slide in spot iron ore prices for fourth quarter deliveries because of regional oversupply caused by reduced steelmaking.
The world's leading exporters of iron ore shipped 435,000 metric tons in the first half of this year, or 15.7% more tonnage than in the first six months of 2007. The top three exporting countries of Australia, Brazil and India shipped a combined 358,000 metric tons, up more than 17% year-on-year, according to the Iron & Steel Statistics Bureau in London. However, press reports indicate that third quarter shipments have been sliding.
Still, Chinese steelmakers acknowledge that their existing contracts with Vale may end up costing more than initially thought. According to terms of some contracts, Vale can hold back some of the iron ore it agreed to sell steelmakers, typically about 10%, and sell it on the spot market, at what is typically a higher price. Steelmakers generally agree to such terms because in softer markets, they don't want to be stuck with extra iron ore.
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